What’s Next for Elan?

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Elan's (NYSE: ELN) board unanimously rebuffed a $6.7 billion takeover offer from Royalty Pharma in early June and hired Citigroup to review “several corporate inquiries.” Things are starting to get very interesting. 

“Both the board and executive management are aligned in exploring all opportunities that maximize the full value of the company for its shareholders,” Elan said in a statement. Apparently, it believes the company is worth much more than Royalty was offering.

Royalty Pharma, an investor in royalty streams from pharmaceuticals, boosted its bid to buy Ireland based Elan by 5% in a second attempt to take over the new streamlined, cash flush biotechnology company.

Royalty Pharma recently offered $13 per share in cash, up from its original $12.50. It also included a contingent value right of $2.50 a share if sales of Tysabri, a blockbuster multiple sclerosis drug, met certain set targets.

“Royalty Pharma’s revised offer continues to grossly undervalue Tysabri,” Elan's board maintained in a statement

Biogen’s Tysabri Ties

The saga began back in April when Elan closed a deal to transfer 100% of the marketing and distribution rights of Tysabri to Biogen (NASDAQ: BIIB). Under the agreement, Elan received $3.25 billion in cash and double digit tiered royalty payments for future sales of the MS drug.

Over the first twelve months following the deal, Elan gets 12% in royalties on sales of Tysabri. Then, Elan will receive 18% in royalties up to $2 billion, and 25% in royalties when sales surpass $2 billion. Last year, Tysabri sales were $1.6 billion.

Biogen has two other notable MS treatments. Just launched this year, Tecfidera sales are already beating lofty expectations. Sales are expected to hit $800 million this year, nearly double what analysts had expected.

Some analysts had worried that Tecfidera (available in pill form) would chip away at another Biogen MS drug, Avonex. Yet that hasn’t been the case. But, Tecfidera is taking market share away from competitor Teva Pharmaceuticals MS drug Copaxone.

The Elan/Tysabri deal bolsters and anchors Biogen’s MS business. Sales of the blockbuster drug, administered by injection and used to treat people with relapsing- remitting forms of MS, rose 8% in 2012. And, Biogen is seeking approval to sell Tysabri as a first-line treatment for the debilitating neurological disease, which could further drive sales.

Elan’s appeal

In Elan’s mission to reinvent itself, it spun off Prothena (NASDAQ: PRTA) in December 2012.  The company focuses on the discovery and development of potential therapeutic monoclonal antibodies directed specifically to disease causing proteins.

Since trading as a standalone, shares have nearly doubled. In addition, it was just added to the Russell Global Index. The company also caught the eye of a couple of analysts.

Wedbush just assumed coverage, issuing an “outperform” rating and $18 price target. Roth Capital recently initiated coverage with a “buy” rating and $16 price target.  Elan retains 18% of Prothena.

Elan’s appeal stretches beyond the spin-off and $3.25 billion in cash it received from Biogen and Tysabri royalties. Interested U.S. based drug makers find the Dublin, Ireland's corporate friendly tax rate quite attractive.  While Elan shareholders are enjoying the renewed interest that is being showered on shares, many would be glad to see the company sold. It’s been one rocky road for investors.

A series of serious setbacks stemmed from rare brain infections linked to Tysbari and disappointing results from several highly anticipated Alzheimer’s studies, performed in conjunction with Johnson & Johnson and Pfizer had sent the once high-flying biotech company all the way down to single digits.  Its recovery, still makes some nervous.

Royalty Pharma still interested

While Royalty Pharma’s bid expired in June, Bloomberg reports the company is not giving up.  According to analysts, Royalty Pharma is mulling over a new offer for Elan, this time with a partner.  However, there are obstacles standing in Royalty’s way. Elan currently isn’t accepting joint bids in the company’s auction, so Royalty would have to negotiate such terms with Elan.

Elan management hints it would be interested in a cash deal of $15-$20. Analysts at Jefferies say Elan could indeed fetch as much as $19.

Let the bidding begin..

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Diane Alter has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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